When and Why Hyperinflating Monetary Authorities Abandon a Currency
11 Pages Posted: 22 Dec 2015 Last revised: 30 Jan 2019
Date Written: December 21, 2015
Abstract
Monetary authorities during a hyperinflation occasionally extract seignorage and then abandon the currency. Modelling the central bank as an exhaustible resource extracting monopolist that equates average and marginal profit to extract remaining seignorage by the optimal stopping time explains this. Remaining seignorage resembles an annuity in which the long position pays a coupon equal to the instantaneous seignorage revenue extracted starting at the initial date, and a short position that pays the same coupon starting at the terminal date. The optimal stopping time decreases with higher seignorage maximizing rates and increases with higher remaining seignorage or real interest rates.
Keywords: Monetary Leviathan, Optimal Stopping Time, Seignorage Maximization
JEL Classification: D92, E31, E41, F31, H21, H27
Suggested Citation: Suggested Citation